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With 2024 set to be another year of change across the supply, distribution and retail automotive markets, Owen Edwards summarises the outlook for the year ahead.
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For the automotive industry, 2023 was a challenging year. It began with a shortage of vehicles due to production issues caused by semi-conductor shortages and post-pandemic supply chain disruption. But then new vehicle stock started to flow back into the market with year-end new vehicles registering of 1.9 million units – a 17.9% increase on 2022 (Source SMMT).
Towards the end of the year, we received industry intelligence that tactical registrations – registering new vehicles that are then sold into the used vehicle market, also known as pre-registrations – were once again taking place. This indicated reduced demand due to higher interest rates, which has created an oversupply of vehicles. The trend for tactical registration of new vehicles was last seen pre-pandemic, which brings us to the big question:
What are the trends for 2024?
New vehicles and used vehicles sales
We forecast that the new vehicle market will grow marginally in 2024 to two million units, an annual increase of around five percent.
Although demand is soft, vehicle supply will rise as manufacturers and supply chain businesses continue to increase production. Original equipment manufacturers (OEMs) are looking to operate their factories at around 80-85% capacity in order to maximise profits. According to data we've sourced from the US – European data is not available – it's clear that production remains below the all-important 80-85% utilisation according to FRED Economic Data. The used car market is able to absorb these cars due to an existing lack of supply caused by the limited number of new vehicles sold over the pandemic period without significantly affecting used vehicle prices.
The used vehicle market will continue to grow as more vehicle supply enters the market, and we expect used cars sales to reach 7.3 million units in 2024 (7.05 million units estimated for 2023) – still well below 2019 sales of 7.9 million vehicles.
We believe it'll be many years before UK used car sales reach 2019 levels. Price volatility for battery electric vehicles (BEVs) is set to continue, caused by the changes in battery technology and uncertainties over whether the EU and the UK will decide to increase tariffs on non-EU BEVs. At present the EU is reviewing the level of governmental support received by the Chinese OEMs when producing BEVs (more on this below).
Manufacturing
OEMs will continue to produce more vehicles globally in order to fulfil the capacity in their factories. But the impact of higher inflation, higher interest rates, and the fact that most OEMs aren't making profits from BEVs, mean that OEMs will have to review their production and investment costs in order to generate savings and grow earnings.
We're starting to see the early stages of cost improvements from economies of scale and changing manufacturing process. One such changing manufacturing process is giga casting: creating large aluminium casting to increase productivity, and reduce the complexities of assembling and costs of building a BEV. According to Chinese electric vehicle manufacturer Xpeng, giga casting the front and rear subframe of a vehicle, rather than stamping and welding it, can reduce the total cost of a vehicle by over 25% per annum. Although such new processes are already used by manufacturers such as Tesla in its US and Berlin factories, and Xpeng and BYD in China, some of the legacy OEMs have started using or investing in giga casting presses – including Toyota, KIA, Hyundai and Ford – suggesting that this new process is here to stay.
This is also the year that Tesla will launch its Cyber Truck, with cost reductions also being tried and tested on this vehicle. The vehicle exoskeleton chassis is made from high quality '30x' stainless steel meaning the vehicle doesn't need to be painted – a process in the factory that is both costly and time-consuming. Furthermore, the panels are air stamped, saving time and cost through simplified panels. Only time will tell if this type of vehicle is desirable and at what price point.
BEVs
New UK legislation aims to ensure that the OEMs supply sufficient zero-emission vehicles (ZEVs): the ZEV mandate indicates that, in 2024, 22% of all passenger car sold and 10% light commercial vehicles (LCVs) will be ZEVs.
Looking at the most recent released consultation document on the ZEV mandate, however, OEMs are able to purchase carbon credits from other OEMs with more than 22% of their vehicles as ZEVs, or can purchase emission allowance borrowings at 3.5% APR from the Government. The cost of the allowance borrowings are significantly lower than the £15,000 fine per passenger car and £18,000 per LCV. We expect, therefore, that those OEMs without a portfolio of ZEVs to meet the 22% target will take up these options. Such a clause in the ZEV mandate could mean that growth in BEVs could be slower than expected for 2024
The cost of BEVs remains high, and therefore the difference in price between an ICE vehicle and a BEV is still stopping some consumers from purchasing a BEV. With limited forms of financial support from the Government and with the rising cost of living, growth in the BEV market in the UK has slowed with market share remaining broadly flat in 2023 (see chart). The current Government’s Benefit in Kind scheme has ensured demand for BEVs remains at about 16% market share of total new vehicles sold.
New vehicle registrations market share by fuel type – petrol, diesel and BEV
Source: Society of Motor Manufacturers and Traders (SMMT)
The cost-efficiencies of Tesla's new 'unboxed' process could make battery-electric vehicles more affordable to buy.
As China’s new vehicle market has slowed, growth for Chinese OEMs in their home market has become limited and Chinese OEMs have made a move to sell vehicles in new markets – of which Europe is one where tariffs are only 10% for new passenger cars.
Such a low tariff compared to that of the US (25% plus) has meant that many Chinese brands have started to investigate entry into Europe and the UK. At present the market share of Chinese vehicles in the UK is only around 4.5% with most of that market share coming from MG, which is owned by SAIC. However, there's increasing interest in other such brands such as ORA and BYD. Both brands produce BEVs or hybrids, while MG’s portfolio of vehicles is broader with BEVs and ICEs.
What these Chinese OEMs have in common is that their vehicles are keenly priced, well built and contain a large number of options as standard, providing value for money. EU investigators are now inspecting BYD, Geely and SAIC to determine whether these Chinese-made BEVs have benefited unfairly from state subsidies. The investigation was launched in October 2023 and is expected to last 13 months.
There's a risk that the EU could decide to increase the tariffs on Chinese-imported vehicles towards the end of 2024 but it's not clear how large those tariffs might be or how they may be implemented. When the US confronted China on supporting its car industry and selling vehicles in the US at a lower price, this triggered a trade war. The US increased tariffs on Chinese vehicles and China moved to control graphite exports coming out of China – a critical resource for the BEV industry as 90% of the world’s graphite resources are processed in China. Therefore, it's not yet clear whether the EU and UK would have the resolve to go toe-to-toe with China.
Chinese brands will continue to enter both Europe and the UK. BYD has already publicly indicated that it will build a battery manufacturing plant in Hungary. This follows companies such as CATL and Samsung, who are constructing their plants in Europe with the knowledge that there will be strong demand for BEVs from the European market.
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The automotive dealer market has undergone significant change since 2019, and more is expected in 2024.
More consolidation of the dealer networks is likely as overseas purchasers seek out value in the UK, the OEMs continue to rationalise their dealer network, and owner drivers look to realise shareholder value.
The implementation of the agency model has been delayed for some brands, but this is expected to strengthen over time. There are initial snags to resolve when implementing the agency model, and these will take time. Those implementing the agency model are encountering difficulties from moving away from a traditional franchised model, which include customer service, the customer complaints process (which becomes the responsibility of the OEM), and the implications of excess vehicle stock.
The increased supply of vehicles is expected to impact new vehicle gross margins. Industry sources inform us that gross margins in the latter part of 2023 were weak, and weaker margins are expected to affect profits. However, this will only be one area in which profits are squeezed: higher interest rates are affecting vehicle stocking costs, while rising wage inflation and general costs such as energy are also impacting profits. As we go through 2024, there should be a strong daily focus on volume sales targets, the retention of gross profit margins across the business, and the identification of efficiency gains and cost savings in order to reduce the impact of a softer market and rising costs.
The Financial Conduct Authority (FCA) is investigating discretionary commission arrangements (DCA) that could have disadvantaged customers who have ended up paying more for automotive finance. Early indications from the FCA review suggest the following groups could be affected: motor finance providers, motor finance credit brokers (including motor dealers), and consumers who have taken out motor finance agreements involving DCAs. The FCA has indicated that, on average between 2007 and 2020, approximately three quarters of all agreements had a DCA of some description, suggesting that the potential claims could be large. We await developments over the coming months.
Consumer Duty came into force on 31 July 2023 and the FCA has written to insurers warning that more action must be taken to ensure good outcomes for consumers. One service that has been highlighted is guaranteed asset protection (GAP) insurance, where only six percent of the amount paid in premiums by customer is paid out in claims, while 70% of the value of insurance premiums is paid out in commissions to parties in the distribution chain, such as motor dealers. Early work has been undertaken in this area, and more investigations are expected.
Chinese automotive brands are increasingly looking to expand into the UK and Europe. What are the market impacts?
How will Chinese automotive expansion affect UK market?
Like the last five years, further change is expected in 2024. The automotive industry has navigated some very challenging environments over the last 20 years – from recession and financial global disruption to COVID-19 impacts – and has continued to grow and evolve. One example of this is automotive dealers who, having dealt with lockdowns, online sales and vehicle shortages during the pandemic, still managed to improve profitability – in some cases significantly.
Companies in the manufacturing, distribution and retail markets can look to enhance growth in 2024 through strategic planning, public and private funding, and navigating compliance procedures such as Consumer Duty, as well as cost reduction and M&A.
For more insight and guidance, contact Owen Edwards.
